Tackling Construction Industry Scheme abuse – KPMG’s consultation response
Tackling Construction Industry Scheme abuse
We respond to HMRC’s consultation on preventing tax loss from the CIS. Could the proposed changes impact your business?
The Government intends to prevent abuse of the Construction Industry Scheme (CIS) by tightening the rules in a number of areas which it views as problematic. A recent consultation sought views on a number of proposals and examined how to promote supply chain due diligence.
At the 2020 Spring Budget, the Chancellor announced a consultation on measures to prevent abuse of the CIS.
The consultation sought views on the following proposals which, if implemented, would apply from 6 April 2021:
- Power for HMRC to amend unsupported CIS deductions where offsets against PAYE are claimed on subcontractors’ Employer Payment Summaries (EPS);
- Amending the ‘deemed contractor’ registration rules so that they apply where rolling construction spend exceeds £3 million;
- Restricting the ‘materials deduction’ in calculating CIS deductions from payments made to sub-contractors so that only materials purchased by the sub-contractor with whom the contractor contracts qualify, and not materials purchased by other sub-contractors further down the supply chain; and
- Expanding the scope of the false registration penalty.
The consultation also set out the following early stage proposals for encouraging appropriate supply chain due diligence:
- A site registration system, with contractors identifying on CIS returns the sites and contracts to which specific payments relate;
- Requiring the ‘main contractor’ to notify HMRC of each entity in the supply chain; and
- HMRC notifying the ‘main contractor’ of CIS fraud in a supply chain so the perpetrator can be removed, with the main contractor potentially liable for any tax loss.
We agree that HMRC should take appropriate steps to tackle abuse of the CIS, but it is important that any changes are considered, proportionate and targeted so that the deliberately non-compliant are held to account whilst burdens are minimised for those that are doing their best to comply.
We summarise below our views on the specific proposals included in the consultation document.
Deductions claimed on an EPS
HMRC should be able to act decisively in real time where there is evidence of CIS deductions being claimed fraudulently or recklessly against PAYE and appropriate sanctions should apply. Equally where there are genuine errors or a misunderstanding, then a lighter touch is needed. We think that the proposed measure needs strengthening where behaviour has been fraudulent or reckless.
The ‘deemed contractor’ rule
Registration based on a ‘rolling’ threshold would require businesses to track construction spend in real time without reference (as now) to the accounting period end. This has the potential to increase the administrative burden for those who could be deemed contractors.
HMRC’s view is that current legislation on materials deductions is open to interpretation, and the proposed change is to clarify that it is only available where the subcontractor itself purchases materials to fulfil the construction contract, not where purchases occur further down the supply chain, which are on-billed up to the main contractor.
However, we consider that the present legislation is intentionally permissive in providing for a deduction where materials are on-billed in this way, at least to the extent of the underlying cost of the materials when purchased. In our view, this is logical as applying a CIS deduction in this situation would represent an over-deduction of tax which would eventually need to be reclaimed from HMRC.
False registration penalties
We agree that the category of persons subject to the existing false registration penalty should be expanded to more effectively tackle repeated and fraudulent CIS registrations. However, a statutory defence should be available to those who had no knowledge of the false registration(s).
Securing CIS supply chains
Whilst the proposals to secure the CIS supply chain are at an early stage, we think it is important that any measures are targeted to reduce fraud, and any further burdens on compliant businesses are minimised and proportionate to the scale of the problem.
We are not convinced that a CIS site registration system is the right way forward in that we think it would lead to an increased administrative burden for no clear compliance upside.
This said, HMRC already hold a lot of information on organisations’ tax compliance and we think that one approach could be to use this to issue sub-contractors with ‘e-tax passports’ that they could use to evidence to contractors that they operate in a tax compliant manner. In effect, this would be an extension of HMRC’s validation of gross or net CIS payment status. We think this would assist in securing the CIS supply chain against fraud and non-compliance.
What happens now?
We understand that draft legislation, effective from April 2021, is due to be published in the autumn.
Given the short lead-in time, contractors and sub-contractors should now review their systems and processes in light of these proposals and assess whether, and to what extent, modifications may be needed to accommodate them.
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